We must be ready to combat the myths and delusions of revolutionary populism

by: Jesse Norman

Political upheaval, a heavy burden of national debt, huge pressure on public spending, a major international rupture, religious conflict, bubbling popular unrest . . . The 1760s and 1770s were a tumultuous time in British history.These decades began in triumph with the conclusion of the Seven Years War in which Britain defeated France in theatres from Guadeloupe to Bengal and laid the foundations of empire. They ended in catastrophe, with international humiliation and the loss of the American colonies. In between, the country had not one or two but seven different prime ministers, a political merry-go-round accompanied by escalating populism. There were riots in support of the radical reformer John Wilkes in 1768, but the potentially revolutionary effect of latent religious tensions was still more threatening.

Yet after 1784 and the election of the Younger Pitt, Britain was settled enough to open free trade negotiations with the French, and strong enough ultimately to fight and defeat Napoleon. And in 1795 the Jay treaty would reveal the new nation of America pivoting away from its French allies and back towards Britain, laying — with more than the occasional later snafu — the foundations of the modern international trading order.Amid the present anger and distrust, there are salutary lessons here, perhaps. History never quite repeats itself, but it nudges us: to recall how much worse things have been, how resilient and dynamic this country often is, how swiftly events can reverse themselves, how even apparently intractable problems can yield unexpected solutions.In fact, the real achievement of these years was not so much practical as intellectual. In 1770, Edmund Burke had set out in canonical form the basis of representative government, and emphasised the central importance of political parties, in his Thoughts on the Cause of the Present Discontents.Six years later Adam Smith would do the same thing for free markets and the benefits of commercial society in the Wealth of Nations. These great works are the hinges of our political and economic modernity. Over what historians call the “long 18th century”, stretching from 1688 to 1815, Britain emerged as a country renowned not merely for empire, but for tolerance, trade, constitutional government and the rule of law. So the UK has largely remained.What, then, can we learn today, in another age of seething popular discontents, from this extraordinary moment? I suggest there are three specific lessons.The first is the need to be clear about the danger. Burke saw revolution coming to France in 1789, long before his contemporaries, in part because he knew its signs: a contempt for public authority, attacks on private property, a populist yearning to ignore inconvenient facts and rush to judgment. We see all of those things today.Burke understood how language could be debased through the rhetoric of abstract nouns such as “liberty” or “equality”, which move people without enlightening them. A century and a half before George Orwell, he saw how political discourse in France was degraded from respectful disagreement with opponents to labelling, personal contempt, and ultimately to public denigration and hatred of them as enemies of society. The result of such trends can only be the supersession of politics, of peaceful exchange and reconciliation of views, by violence.We are a long way from revolution now. But signs of political extremism are being normalised and becoming ubiquitous, made ever easier by the echo chambers of social media. The second lesson is the requirement to tackle populist myths. Take the French Revolution: it was expected to end privilege, destroy elites, enfranchise the poor and break the power of the church. In fact it did none of those things. It led to violence, bloodshed, anarchy, terror and civil and then international war, at the cost of hundreds of thousands of lives. In many ways it was an utter catastrophe.

Similar myths proliferate today. Free markets have their weaknesses, but when they function properly they are not tools of an evil capitalism but the greatest force for human economic development, equality and freedom ever created. We need to take these myths on and make the argument against them.But most importantly, we must make the case again for representative government, and for the liberal virtues of our commercial society. Britain’s is a constitution in which parliament, not the people, is sovereign. Our political and legal institutions, our monarchy, our courts, have an interlocking logic of their own. They are the products of evolution, across hundreds of years of conflict and compromise, and mutual accommodation.They thus encode a set of understandings and arrangements that can never be written down and could never be rationally devised now by any set of legislators. They can always be improved, by careful and gradual reform. But collectively, they blend legitimacy with expertise, and sensitivity to immediate concerns with a capacity for long-term decision-making. However much we may despise our legislators, we must respect our institutions.It seems to be the fate of every generation to think of its own issues as entirely new and without precedent. That is a dangerous, indeed a potentially revolutionary, delusion. It springs often not from mere ignorance, but from a willed decision to ignore history and seek a new beginning. We need to combat it with knowledge, energy, respect and love. The writer is Conservative member of parliament for Hereford & South Herefordshire and a biographer of Edmund Burke

PARIS – “It is accomplished…” In the years when I listened to music nonstop, the passage marked by those words was for me one of the most intriguing in Bach’s St. John Passion.

In a plaintive soprano accompanied by a cello’s lament, lingering between song and silence, the memory came back to me on Monday morning, the day after the second round of France’s parliamentary election. The event that has been accomplished, of course, is President Emmanuel Macron’s plan to obtain a majority in the National Assembly.

But, whether we like it or not, there is more to the event than that. Another accomplishment was the record-high abstention rate: 57% of French voters disdained the rare and precious privilege of voting, a privilege invented several centuries ago by men who believed in deliberation, reason, and enlightenment.

Inevitably, we will hear commentary about an electorate exhausted from a dramatic year in which France’s political foundations shifted and its traditional points of reference were obscured. We will be told about the inner wisdom of a nation that already knew the outcome and wished, without saying so, to avoid the appearance of an excessive victory. Blame will be placed on the weather, the bridges, the media, the bitterness of spurned leaders, and the unknown quantities represented by the new faces of the president’s army of candidates.

But I do not believe that these anecdotal responses will hold up for long. I cannot avoid hearing, in the deafening silence of the millions who abstained, the dissonant note one always detects in victorious fanfares. One never knows, at first, whether it is just a false note, the sound of things falling and continuing to roll briefly before finally coming to a stop, or a real clunker, a more jarring interruption, the herald of a real crisis.

And we cannot rule out that Sunday’s most salient statistic (that 57%!) signifies not only the last gasp of the supine corpses that had been yesterday’s political apparatus (and that may rise again to become tomorrow’s populist parties). It could also reflect a process of dereliction, desertion, and dispersal; one that affects, beyond the vote, the idea that the French hold of themselves, an idea that suddenly appears phantasmagoric.

Hobbes warned us. “The people” is always an artifact. Given the unsociable sociability of human beings, driven by their appetites and passions, the process by which it is fashioned is both brazen and fragile.

And, in the real world, it is the social contract, with its institutions and procedures, its modes of deliberation, delegation, and mediation, and, in particular, its votes, that stands behind the noble invention of a “people” and accounts for the fact that those who comprise it occasionally take a break from tearing each other limb from limb. I cannot help but wonder, in the aftermath of France’s “Abstention Sunday,” whether the sound we hear is not the seizing up of this splendid, subtle machine.

I wonder, too, if we are not nearing the end of a process of dissolution that now threatens to turn the abstraction of “the people” irreversibly into a fiction, one nearly impossible to imagine (let alone put a face to) and even more difficult to believe. I wonder if the satisfaction of being a people – as invented by the first Europeans and Americans, reinvented by the French celebrants of national unity on July 14, 1790, and celebrated by the French historian and poet Michelet – is not becoming a thing of the past.

That would seem to leave us to choose between two stances. We can accommodate ourselves to this irreality and Macron’s newly installed representatives, so preternaturally smooth and remote as to suggest that they might have been elected while Leviathan was sleeping. Or we can rely on Facebook and Twitter to restore a semblance of will and sovereignty to what used to be called the people, by technical means that enable real-time responses to instant referenda.

But there is another alternative: to detect in the prospect of answers without questions and choices, without deliberation or even thought, a path that will lead eventually only to more inhumanity, owing to the urges that may at any moment take hold of a people that senses itself withering away. In that case, we could gird ourselves with intelligence, reason, and courage; return in force to the political arena; and, inspired by the Enlightenment’s legacy, recast in today’s language the theorems of representative democracy, a political system that remains (and will long remain) without peer.

We must reassemble what is falling apart and drifting away like icebergs. We must close the wound from which flows the lifeblood of a fragmented society. In short, we the people must refound ourselves on the rubble of a smoldering world that trembles beneath our feet. Such is the true revolution toward which Macron and his parliamentary majority will have to work in France.

The task is immense, historic, and ultimately meta-political. No single individual, nor several, nor even an overwhelming majority can accomplish it. What will be needed is the general will – no longer just individual or collective, but truly general – of the Republic of France. And then, as in Bach’s St. John Passion, in which the lamentation that “It is accomplished” is followed by strings of Resurrection, it will become possible once again to discern in France’s politics the traces of French history – and the path to France’s future.

As advertised by Beijing, the “One Belt, One Road” (OBOR) initiative, China’s grand scheme for knitting a network of roads, ports, railways and other links from East China through Southeast and South and Central Asia all the way to Europe exceeds both in scope and ambition the Marshall Plan used to rebuild Europe after World War II.The “belt” of land-based links is paired with a 21st century “Maritime Silk Road” stretching from Australia to Zanzibar. Chinese President Xi Jinping launched the OBOR initiative in 2013, two years after then-U.S. President Barack Obama initiated the Trans-Pacific Partnership (TPP) trading bloc across the Pacific region. Now that Obama successor Donald Trump has carried out his pledge to withdraw from the TPP, the expectations are that Chinese-backed strategies like the OBOR will gain momentum. China experts say that this is a positive development, but there is skepticism over whether Beijing will follow through with the gargantuan amount of funding needed, whether big debt-financed projects bankrolled by China will benefit the recipient countries, and whether those projects will actually make sense in the long run.For many countries in the region, China is by far the biggest source of financing: Beijing’s Export and Import Bank of China alone lent $80 billion in 2015, compared with more than $27 billion from the Asian Development Bank. Chinese involvement in building railways, ports, roads, dams and industrial corridors is helping to expand its economic and geopolitical sway across Asia, the Middle East, Europe and Africa.China experts and economists say that the initiative makes sense and that it will accelerate as the U.S. turns more insular under Trump. “It is unfortunate that many U.S. diplomats and members of the previous administration worked for nearly a decade to push toward the TPP and now it is torn apart,” says Louis Kuijs, head of Asia Economics at Oxford Economics in Hong Kong. The U.S. is turning its back on the rest of the world at a time when the world needs an open and engaged America, he says. “It is very likely and understandable that China … will try to fill those gaps with this initiative, and that is very logical — it’s something the U.S. will later deeply regret,” Kuijs says.The OBOR effort has not gotten the degree of attention it deserves, says Pieter Bottelier, visiting scholar of China Studies at Johns Hopkins School of Advanced International Studies in Washington. “I am concerned that its significance is underrated in the U.S. and in the West in general. It is a very positive initiative and a major vision of how China can collaborate with countries in its neighborhood, Europe, Latin America and Africa in a way that is in the long-term interest of China and [the global economy],” Bottelier says.The geopolitical aspects of the OBOR initiative could eventually draw attention from the Trump administration, given its strong stance on national security. “It is an economic initiative, but along the way China will expand its military bases and so forth,” says Wharton emeritus professor Franklin Allen, who also is a professor of finance and economics at Imperial College London. “On the sea routes they will develop their military capability and on the land routes, too.”From Kuijs’ point of view, Beijing views the OBOR initiative as a strategy needed to support its growing economic might. “Many outsiders are skeptical and do not know exactly what it is, but it is taken very, very seriously by the Chinese government and we should take this very seriously,” he says. “The Chinese government is thinking, ‘We are the second-biggest economy in the world, and it may take 10 years or 20 years but we will be the world’s biggest economy at some point.’”While it is sweeping in scope like the stalled TPP, which aims to create a trading bloc around the Pacific Rim, the “One Belt, One Road” plan is not a free trade agreement. It’s more of a blueprint for integrating China’s trading partners by developing their infrastructure — ports, roads, airports and railways — in a way that complements Beijing’s own interests. Infrastructure-led development worked well for China, in Beijing’s view, and now it wants to expand that approach internationally, Kuijs says.The “One Belt” refers to a “Silk Road Economic Belt” from China through Central Asia to Europe. The “One Road” refers to Beijing’s concept of a “21st century Maritime Silk Road” to connect China to Europe via the South China Sea and Indian Ocean. The initiative involves developing six economic “corridors”: a China-Mongolia-Russia corridor; a new Eurasian “Land Bridge”; a corridor from China to Central Asia and Western Asia; a China-Indochina peninsula corridor; and, a China-Pakistan economic corridor; and 6. a Bangladesh-China-India-Myanmar economic corridor.Chinese President Xi Jinping said in his speech at the World Economic Forum in Davos, Switzerland in January that more than 100 countries and international organizations have given warm responses and support to the initiative and that more than 40 countries and international organizations have signed cooperation agreements. So far, Chinese companies have made more than $50 billion of OBOR-related investments and launched a number of major projects in the countries along the route, he added. At least 65 countries are included in the OBOR initiative.Unanswered QuestionsWhile the grand vision is laudable, there are many unanswered questions: How would it be done? And what would be the project, environmental and engineering standards implemented under this umbrella?“There would be serious doubts over protection of minority populations and environmental concerns,” Bottelier says. As for the scale of OBOR, there’s no consensus over how many projects it would involve at what cost and in what time frame. “It is pretty obvious that there is no limit to the amount of infrastructure that is needed in those countries.”The Asian Development Bank says infrastructure development in Asia and the Pacific will exceed $22.6 trillion through 2030, or $1.5 trillion per year. In a recent report, “Meeting Asia’s Infrastructure Needs” issued in February, the estimate rises to more than $26 trillion, or $1.7 trillion a year when costs for climate change adaptation and mitigation are included. “This is a grand vision, and it may take a decade, but there is no rush. You cannot really put any number on the total investment,” says Rajiv Biswas, Singapore-based Asia-Pacific chief economist at IHS Markit.The China-led Asia Infrastructure Investment Bank, or AIIB, is seen as a linchpin for OBOR financing. So far, however, it has provided only $1.73 billion to support infrastructure projects in seven countries, including Pakistan, Bangladesh, Tajikistan, Indonesia, Myanmar, Azerbaijan and Oman since it was launched in January 2016.Noriyoshi Ehara, chief economist at the Tokyo-based Institute for International Trade and Investment, says the financial infrastructure for OBOR is gradually taking shape. Apart from AIIB, China also has a $40 billion Silk Road Fund and a New Development Bank to fund the OBOR initiative. “There has been good progress in getting these frameworks in place,” Ehara says. Ultimately, he adds, Beijing may not limit OBOR to infrastructure but may make it the foundation for regional and bilateral free trade areas (FTAs). “We are not sure if China will succeed, but the world is changing, and more and more countries are joining this initiative,” he says. With the TPP in trouble, OBOR is getting more attention.China’s Deep PocketsAlready, more than $900 billion in projects are planned or underway, Fitch Ratings noted in a report titled “China’s One Belt and One Road Initiative Brings Risks.” It says most funding will likely come from China’s policy banks, the Export and Import Bank of China, China Development Bank and its largest commercial banks. “We estimate that outstanding loans from Chinese banks total $1.2 trillion, and a large portion of that has financed infrastructure projects involving Chinese state-owned enterprises,” the report says. China also has other major financial resources such as its sovereign wealth fund and foreign exchange reserves.One project that got a head start was construction of a railway link from the port of Piraeus in Greece to Eastern Europe. Piraeus is a gateway to Europe for Chinese products, and major Chinese companies have been using the port to enter the European market. China, through its China Ocean Shipping Company, bought a 67% stake in the port’s Pier I from the Piraeus Port Authority SA in January 2016.The European Union (EU) is welcoming OBOR, but cautiously. “China basically owns Piraeus Port close to Athens and this railroad is meant to link all the way up to Budapest in Hungary, which also is an EU member,” notes Kuijs. “The EU is now looking at this project, which clearly is projecting China all the way into Europe, to see to what extent it is compatible with EU rules and principles.”Apart from questions over whether Chinese-led projects might conform with global standards on such issues as environmental protection and labor rights, some economists question if a massive, policy-led OBOR push on infrastructure development will turn out to be economically sound. “Let’s see what kinds of projects they are getting in the next couple of years and what kinds of returns they are getting,” Biswas says. “Because in the end, if they are not delivering on the returns, then the banks that are lending will eventually say we need to be careful and we cannot keep doing this without any returns because it has to be commercially viable.”A flood of lending to smaller countries lacking strong foreign exchange reserves might not be able to repay the loans if projects fail to generate revenue as expected. Fitch warns in its report on OBOR that some of the loans are large enough to have an impact on borrowing countries’ public finances, if debt-servicing from project proceeds becomes a problem.That problem already is surfacing in Sri Lanka, where China signed a deal in late 2016 to further develop the strategic port of Hambantota and build a huge industrial zone nearby. China has spent almost $2 billion so far on Hambantota and a new airport. But hundreds of Sri Lankans clashed with police at the opening of construction in January of the industrial zone in the south, saying they would not be moved from their land. It was the first time opposition to Chinese investments in Sri Lanka turned violent. Newly elected Sri Lankan President Maithripala Sirisena had said the new port deal with China was unfair in his campaign, but after taking office approved an agreement to lease an 80% stake in the port to the China Merchants Holdings for 99 years in exchange for $1.1 billion in debt relief.Concerns over the ability of smaller developing countries to protect their own interests underscore the need for involvement of Western countries, especially from the EU, since Japan and the U.S. have continued to shun the AIIB. “You have weaker institutional capacity and weaker governments like in Cambodia and Central European countries. They may be persuaded by Beijing to take on large debt to finance projects. They and other developing countries in the past ended up with large debts incurred to finance dubious projects that do not help their economies. That is the risk for countries that do not have the capacity to independently make cost-benefit analyses,” Kuijs says.While there’s nothing wrong with investing more in poor countries, and in increasing economic interactions between poor countries and China and the rest of the world, “it would be beneficial for Western countries to take this initiative very seriously and to become its counterparts in this rather than having China sort it by itself,” he says.Of course, that begs the question of whether China would welcome their involvement. “This is China’s initiative, but this is not the AIIB. They want the rest of Asia to be part of it, but more on a bilateral level,” says Biswas. China’s vision is of a partnership with other developing countries in Asia. “Having Europe be part of it is a different story,” he says. “One Belt, One Road is relevant for Europe since China wants to link its rail to Europe. So, China wants Europe to be part of [OBOR], but not as a key driver,” Biswas added.China’s Slowdown Is a CatalystOne of the main factors driving the OBOR effort is the slowdown in China’s own economy. The Communist Party is striving to transition away from growth led by investment and exports to development led by domestic consumer demand and services, and to keep growth at more sustainable levels than in the past. The government set a growth target of 6.5% in 2017 at the National People’s Congress in March, down from a 2016 target of 6.5% to 7%. In a sense, China is seeking to export the investment-led part of its economy, to help its own overbuilt heavy industries and provinces.But Kuijs doubts OBOR projects will do much to help China with its huge overcapacity problems in many industries, especially steel, glass and cement. Compared to the size of China’s steel industry or other industries, it would take a very long time for demand from the projects to be big enough to make a difference, he says. “Many of the projects are far away from China, and some types of steel are worth transporting but not all kinds of steel. It would not help reduce excess capacity of cement because it is not economically viable to transport cement over such long distances,” Kuijs says. Bottelier, also, sees overcapacity as only a marginal factor in the OBOR plan.Looking back at how far China has come since it launched its market-oriented reforms and opened its economy, there’s reason to hope the OBOR strategy will have a significant impact over time, Allen says. “It is quite likely that China will succeed in this initiative, though it may take a half-century.”

The 10-year Treasury should stay low because ‘inflation is missing,’ writes a Charles Schwab strategist.

By Kathy A. Jones

Here are the key points of this article.

• In the second half of 2017, we expect 10-year Treasury yields to remain in a 2% to 2.5% range, consistent with the eight-year “lower for longer” theme in the bond market.

• We expect the Federal Reserve to continue to tighten monetary policy gradually, with one more 25-basis-point, or 0.25%, increase in the federal funds rate and a gradual reduction in its balance sheet, assuming inflation doesn’t slip further.

• We continue to suggest investors target an average fixed income portfolio duration in the short-to-intermediate term, or about three to seven years.

The bond market continues to confound the experts. Each year since the end of the recession in 2009, consensus expectations have called for higher bond yields and the death of the 35-year bond bull market.

Yet 10-year Treasury yields are now nearly 200 basis points lower than in 2010. Initially it looked like 2017 might be the exception. Ten-year Treasury yields had surged from 1.85% just after the November 2016 elections to 2.6% in anticipation of stronger growth and inflation as the result of tax cuts, deregulation and increased government spending on infrastructure. Yet by the end of the first quarter, yields had peaked and were headed lower again, despite—or perhaps because of—a rate hike by the Federal Reserve.

In the second half of 2017, we look for 10-year Treasury yields to remain in a 2% to 2.5% range, consistent with the eight-year “lower for longer” theme that has defined the bond market’s action. The 1.36% low reached in 10-year Treasury yields last year was probably the low for the bull market, at least until the next recession, but we don’t see a bear market on the horizon because inflation remains tame. More likely, bond yields will continue to be low by historical standards, with the borders of the range shifting over time.

Economic conditions support yields above 2%

We are optimistic about the economy based on the prospects of improving global growth, easy financial conditions and solid consumer spending. For the first time since the financial crisis, the global economy is experiencing a synchronized upturn. Based on forecasts by the International Monetary Fund (IMF), gross domestic product (GDP) growth in both developed and developing countries is moving higher on a year-over-year basis. Although not a robust upturn, it is a change from the past few years, when recession and deflation worries gripped parts of the globe and foreign bond yields were in negative territory.

Easy financial conditions are also supportive for the U.S. economy. With interest rates low, credit spreads very narrow and the dollar declining, the Chicago Fed’s National Financial Conditions Index has dropped to a level historically associated with GDP growth of about 3%. Although we don’t expect 3% annual growth in the second half, the sustained period of easy financial conditions should be positive for economic growth through at least the end of the year. Going back to 1980, there has never been a recession in the 12 months following a period when financial conditions were this easy.

Consumer spending should continue to underpin the economy, even without tax cuts or increased federal spending. Low unemployment and steadily rising wages should be enough to keep consumer spending, which represents nearly 70% of GDP, driving the economy forward. Throughout this expansion, real GDP growth has averaged about 2%, and we look for that trend to continue or even improve slightly due to the strengthening of the labor market.

The Fed is expected to tighten policy gradually

We expect the Federal Reserve to continue to tighten monetary policy in the second half of the year, with one more 25-basis-point, or 0.25%, increase in the federal funds rate and a gradual reduction in its balance sheet, assuming inflation doesn’t slip further.

The Fed has laid out its case for tighter policy. It believes the economy is on a sustainable growth track, unemployment is very low and inflation is moving toward the Fed’s target 2% rate, allowing for a return to more “normal” policy. Currently, short-term interest rates are still lower than the inflation rate, leaving “real” rates negative, and the size of Fed’s balance sheet stands at about 23% of GDP, the second highest in modern history. Nothing about its policy stance is “normal.”

The market however, isn’t aligned with the Fed on the potential for short-term interest rates to rise. In its latest Summary of Economic Projections, the median estimate for the federal funds rate is 2.12%, while market expectations suggest a rate of 1.5% for the end of 2018. Moreover, the Fed’s estimate of the longer-run “neutral” rate—the rate at which inflation is stable—is 3%, while the consensus among economists is only 2%.

The divergence in these expectations is a factor holding down bond yields by keeping the risk premium low or even negative. This risk premium (also called the term premium) is the extra yield that investors demand to hold longer-term bonds, due to the risk that rates may rise faster than anticipated. In other words, an investor in long-term bonds should get a premium for tying up his or her money for a long time rather than investing in short-term securities and rolling them over. Currently the term premium has fallen into negative territory. In other words, the market does not see the scope for short-term rates to move up as much as the Fed does.

The Fed could use its balance sheet to send bond yields higher with outright sales, but that seems like an unlikely outcome in the absence of inflation. Fed officials have been clear that their aim is for a gradual decline in the balance sheet that doesn’t disrupt markets. While the market will need to absorb more of the Treasury’s financing needs as the Fed tapers its bond investments later this year, we believe the demand for income-generating assets is strong enough to limit the impact on bond yields.

Tempering expectations for rates to move higher: Inflation is missing

Despite the positives forces on the economic front, we don’t see inflation picking up significantly. While the labor market is tightening and wages should pick up, structural changes seem to be tempering the gains. Global competition and substitution of technology for workers seem to be holding down wages, especially for lower-skilled workers. Concurrently, an aging population and the legacy of the financial crisis appear to have shifted consumers’ attitudes about saving versus spending. Since 2005, the savings rate has moved up from less than 2% to over 5% despite slow wage growth and low interest rates.

Strategies to consider

Solid GDP growth in the 2% region, a recovery in global growth, and tightening Fed policy suggest that there is upside risk to yields from current levels. However, in the absence of higher inflation, the result is likely to be continued flattening of the yield curve. We continue to suggest investors target an average fixed income portfolio duration in the short-to-intermediate term, or about three to seven years. In that region, an investor receives about 65% of the yield available without taking all of the duration risk associated with holding long-term bonds.

As long as the economy is showing resilience, corporate bond yields should remain low relative to Treasury yields of comparable maturity. However, with the yield spreads already far below average, there isn’t much room for price gains from current levels. Similarly, municipal bonds have outperformed Treasury bonds year-to-date, especially those with short maturities, so further price gains may be limited. International developed market bonds are likely to continue to underperform U.S. bonds. Yields in most major markets are significantly lower than in the U.S. and we expect at least a modest appreciation in the dollar as the Fed tightens policy.

How could we be wrong?

Whenever we project into the future, we try to ask ourselves how we could be wrong. A few possibilities come to mind:

• Congress could move forward with expansive fiscal policies—tax cuts and/or increased government spending—later this year. If policies are enacted that are expected to boost growth, inflation and the budget deficit, bond yields would likely move higher, possibly testing the year’s high at just over 2.6%

• Inflation could surprise on the upside if low unemployment leads to higher wages. Market expectations are for low inflation to continue.

• The Fed could tighten policy more than the market is anticipating. Rate hikes without evidence of inflation would likely flatten the yield curve further and send bond yields lower.

While we don’t anticipate these developments, we’ll be monitoring the economic data and the policy news to stay ahead of any market-moving developments.

Jones is Chief Fixed Income Strategist at the Schwab Center for Financial Research, a unit of Charles Schwab & Co.

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.